In spite of heightened tensions around the Crimea, volatility continues to be drained out of G10 currency cross rates last week. The euro, dollar and sterling all traded within a narrow 0.5% or so band throughout. Risk assets were not so lucky. Tensions around the Ukraine and continued fears of a Chinese economic slowdown hit world equities and non-agricultural commodities, while US, German and UK Government bond yields all ended the week 10-15bp lower on the back of flight-to-safety bids.

GBP

As is usually the case, the second week of the month was the sparsest in macroeconomic information out of the UK. Construction activity in January came in a touch stronger than expected and industrial production a bit softer. Overall, there is no reason to change expectations of first quarter growth around the 2.5% level. It was an unusually busy week for MPC members, four of whom spoke at the Treasury Select Committee. They did not greatly clarify the MPC’s view of the likely timeframe for interest rate hikes, though they did communicate that there is a large dispersion of views in the Committee on the amount of slack currently in the economy. Sterling moved in the tightest range we have seen so far this year, trading in a narrow 0.5% band against both euro and the dollar.

EUR

Economic data was also sparse last week out of the Eurozone, beyond some possibly weather-driven softness in industrial production. On the other hand, Draghi made some surprisingly dovish comments about the euro. He blamed much of the dangerously low inflation in the Eurozone on the currency’s strength, and suggested that the ECB is paying close attention to the euro exchange rate. Such explicit comments on currency strength are quite rare from the ECB. We think that this is the first of many complaints we will be hearing from Eurozone policymakers about the need for a weaker exchange rate to jump start the sluggish economy.

USD

The always volatile monthly retail sales number for February came in at +0.3%, but there were sharp downward revisions to the previous two numbers. The combined number for the first two months is a weak -0.3%. However, it remains to be seen how much of this weakness is the result of extreme winter weather. We will wait until March data is available to revise our first quarter estimate for US growth, which now stands at +2.5% – though the risk right now is to the downside. None of this is likely to change the pace of the taper; we expect the Federal Reserve to announce another $10 billion reduction in monthly asset purchases next week.